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Some of us are lucky enough to receive a return on our taxes, but most people who are self-employed will wind up owing the IRS in some form or fashion. If you’ve had an exceptionally good year (or if you haven’t been setting aside enough money throughout the year for taxes), you may find yourself facing an impossibly large tax bill & in need to setup an IRS payment plan.
So, what do you do when you owe more than you can pay by the deadline Set up a payment plan with the IRS, of course! Believe it or not, the IRS isn’t a completely heartless organization, and they certainly aren’t your enemy. They’ll work with you to structure your payment schedule in a way that doesn’t leave you broke and ensures your bill is paid.
How do you go about making a payment plan with the IRS, and what do you need to know going in? Here, we’ll go through how to go about negotiating a payment plan with the IRS that saves your budget while remaining mindful of interest and penalties.
Of course, it’s best to pay the full amount you owe when it comes time to pay your tax bill. Doing so allows you to pay the least amount possible by avoiding late penalties and fees. That said, you’re a person, and people don’t always do the thing they “should” do -- including pay their taxes in full by April 15.
If this sounds like you, first of all: don’t panic. File your return on time, and pay as much of your balance as you are able to by the deadline. By minimizing the amount you need to pay over time, you’ll minimize your penalties and interest in turn.
Whatever you do, do not fail to file your return. Even if you are unable to pay anything at all by the deadline, file that return! Failure to do so will open you up to additional penalties, costing you more money in the long run.
After filing your return, noting your balance, and paying off as much of it as you are able to, the next step is to set up your IRS tax payment plan.
A tax payment plan allows you to pay off the tax you owe in small payments, rather than in one lump sum. You can arrange to take as many as six years to pay your balance in full (though we recommend completing your IRS payment plan more quickly than that if you are able to, in the interest of reducing interest and penalty payments.
It’s important to know that IRS payment plans do not reduce the amount of tax you owe. You are still accountable for every cent you owe the IRS -- the difference is, you’ll have more time to pay your balance.
In addition to the original amount, you’ll also be required to pay interest on the amount you owe, as well as any applicable penalties and fees, until the balance is fully paid. That said, the interest and penalties will decrease as you continue to pay your balance down.
Once you’ve entered into an IRS payment agreement, they generally won’t send your account to collections or take other action against you -- provided you’re meeting the terms of your agreement, that is.
If you default on your payments, you could open yourself up to a tax lien on your property, wage garnishment, or levying your bank accounts. Once you default, you make yourself vulnerable to a variety of extra penalties, so keep up with those payments!
There are two types of tax payment plans: short-term plans, in which you pay your balance within 120 days of the due date (or no longer than 4 months), and long-term plans, which give you a window of up to 72 months (6 years!) to close your balance.
Besides the durations of the two plans, there’s another key difference: short-term IRS payment plans don’t require you to pay a setup fee in addition to interest. This means that, if you can swing it, a short-term option will save you money in the long run by avoiding this additional charge.
If this isn’t an option for you, don’t sweat it. You can choose to setup a long-term payment plan with the IRS. You’ll have to pay the setup fee, of course, but that’s a much better option than defaulting on your payments and facing collections -- or worse.
The good news is, setting up an IRS tax payment plan is easy. You won’t need to hire a tax pro or pay for other expensive services to manage it -- all you need is a computer with an internet connection and your tax return details.
If possible, you should apply for your IRS tax payment plan online. This is because the online application process is faster (and cheaper) than off-line applications. You can request for a payment plan online if you:
Additionally, there’s an opportunity for businesses to apply for an online payment agreement, on two conditions: first, they must owe $25,000 or less from both the current and prior calendar years together. Second, they’ll need to be able to pay off their full balance within 24 months.
If you’re an independent contractor or a sole proprietor, you should apply for your payment plan for taxes as an individual, not a business. You’ll have more flexibility with the terms of your agreement as an individual than you will as business.
To apply for an IRS payment plan for taxes online, visit the IRS website. Once there, you’ll need to create your account. That said, if you’ve registered for an Online Payment Agreement, Get Transcript, or an Identity Protection Pin (IP PIN) in the past, you ought to use the same User ID and password you used before.
In order to set up your online IRS payment agreement, you’ll need a few important pieces of information:
Additionally, it’s a good idea to have in mind a monthly payment amount that you can afford, as well as an ideal due date, when you apply. You’ll need to pay off your balance within 6 years, or 72 monthly payments.
You’ll also need to decide how to make payments to the IRS. There are two options to make payments on your tax payment plan: direct debit, or mailing a physical check to the IRS each month.
While having the control of writing the check can be important, the IRS prefers to be paid via direct debit. With this option, your bank will automatically send the agreed-upon amount to the IRS at the same time each month, so that you don’t have to worry about ever being late on a payment.
Additionally, the setup fee for direct debit is considerably lower than other plans: $31 versus $149 for other payment methods. When deciding how to pay the IRS, online payment through direct debit offers considerable advantages.
Another benefit of applying for an IRS payment plan online is the immediacy of the decision: after submitting your application, you’ll receive instant notice of whether or not your plan was approved, giving you time to make adjustments if necessary.
If you don’t meet the criteria necessary to apply online, you’ll need to fill out and mail a paper application to the IRS. To do this, use Form 946, Installment Agreement Request. If you owe more than $50,000, you’ll need to file an additional form, Form 433-F, Collection Information Statement, and give the IRS some pretty detailed financial information.
The setup fees for filing your application on paper instead of online are higher (since an actual person has to look at your application and make a human decision, which takes more time than an automated program), even if you’re using direct debit: $107 for direct debit online payments and $225 for other payment methods.
After your IRS tax payment plan has been approved, you’re responsible for meeting its terms. If you default, the IRS will very likely take legal action against you, to the full extent they are able to. They’re not exactly an organization known for their mercy, after all.
To keep from defaulting, you’ll need to do two things: first, pay at least the minimum payment, and pay it on time! If you can pay more, absolutely do -- it’ll chip away at future interest and decrease your balance in one go. Secondly, file all your returns on time, and pay all taxes you owe on time and in full.
If you move, you’ll need to notify the IRS of your change of address. This is easy: just mail Form 8822, Change of Address, to the appropriate office.
If, for some reason, you need to change the terms of your payment plan, you can use the Online Payment Agreement tool and select the Apply/Revise button. From there, you can make changes like giving yourself more time to pay off your balance (up to the 72-month maximum, of course) or moving the date of the month your payments are due.
An IRS tax payment plan is a wonderful option if you’re in the financial position to pay your debt in full within the 72-month window. However, a payment plan won’t lower the amount you owe, it will only give you more time to pay the full amount.
If you’re looking to reduce the amount you owe, there are a couple of alternatives. If paying your tax debt in full will cause you substantial economic hardship, you could qualify for a program to reduce the amount you owe by reaching a compromise with the IRS.
In order to do this, you’ll need to use an IRS formula that weighs your state income and assets to determine how much you can afford to pay. Based on your findings according to this formula, you’ll submit your offer to the IRS (in writing).
If your proposal is approved, you’ll have up to 24 months (2 years) to pay off the reduced amount. Once you’ve paid off this amount, your debt will be considered paid in full.
Another option, albeit a less attractive one, is to file for bankruptcy. This is a complex process that will have long-lasting implications for your financial status, so you should consult a specialized attorney for more information about the suitability of this option for your circumstances.
Don’t let a large tax bill stress you out. There are plenty of options available to help you pay your tax debt in such a way so that you can continue to live your life without fear of legal action. Make sure to file on time, pay what you can up front, and apply for your tax payment plan online if possible. Next year, maximize your deductions by tracking your mileage and expenses automatically to ensure you don’t leave money on the table at tax time.
If you have any additional questions about the IRS Tax Payment Plan or anything else, leave your comments below and our team will reply shortly.
We help people save time and money. At Everlance, we're on a mission to empower mobile workers and businesses. That sometimes leads us to generalize tax information. Everlance team members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.
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